Broker Check

New Beginnings

| January 23, 2018
Share |

I enjoy the holiday season even more now that two of our three kids are in college. We close the Stewardship office for the last week of the year, which gives us a chance to reflect on the past year and refine our vision and plans for the upcoming year and beyond. This season was a little different due to the last-minute Tax Cuts and Jobs Act of 2017, which was signed into law on Friday December 22. I ended up spending a good bit of time working to understand how this would affect our clients and then took a few steps personally to take advantage of new opportunities before the Act became law.

It amended the Internal Revenue Code of 1986 and includes reducing tax rates for businesses and individuals, limited deductions and personal exemptions, reducing the number of individuals affected by alternative minimum tax (AMT) and eliminating AMT for corporations. The Act also reduced the number of estates impacted by the Federal estate tax and repealed the individual mandate of the Affordable Care Act.

Here are some of the details that may affect you

  • Tax brackets changed as follows: 10% bracket stays the same; 15% bracket will be lowered to 12%; 25% bracket will be lowered to 22%; 28% bracket will be lowered to 24%; 33% bracket will be lowered to 32%; 35% stays the same and 39.6% bracket will be lowered to 37%.
  • The Standard Deduction will nearly double to $24,000 for married filers and $12,000 for single filers but may be offset by the elimination of the $4,050 per individual personal exemption.
  • Itemized deduction of combined state and local income and property taxes is capped at $10,000.
  • Home equity loans are no longer deductible unless the funds are used for home improvements. Existing loans are not grandfathered.
  • New home mortgage interest deduction reduced from loan size of up to $1M to $750k.
  • All miscellaneous itemized deductions, including payment of tax preparation and investment advisory fees are eliminated.
  • The Alternative Minimum Tax (AMT) impact is reduced, with a higher exemption limit ($109,400 from $86,200 for married filers) and a higher phaseout. AMT’s impact is further reduced by the $10k cap on state and local taxes as this deduction often triggered AMT in the past.
  • The child tax credit is doubled from $1,000 to $2,000, $1,400 of which will be refundable. There is also a $500 credit for other dependents, versus zero under previous law.
  • 529 College Savings Plans can now make qualifying distributions for K-12 students including private schools.
  • Pass-through business entities, including sole proprietors, will be able to deduct 20 percent of their business income from taxable income, subject to some restrictions. These rules are complex and your situation should be discussed with a tax professional.
  • Taxable business entities (C Corporations) will see a large reduction in tax rate from 35 to 21 percent but will also lose some deductions.
  • Estate and Gift tax exemptions are doubled up to $11.2M per individual after 12/31/17.
  • The individual health insurance mandate and accompanying penalty as part of the Affordable Care Act is repealed effective 2019.
  • Alimony paid to an ex-spouse is no longer deductible by the payer and no longer included in the recipient’s gross income, effective for divorce and separation agreements signed after December 31, 2018.
  • No more Roth conversion recharacterization, which means once a Roth conversion is done it cannot be undone.

Most taxpayers will see a reduction in income taxes and many more taxpayers will no longer
itemize their deductions due to the increased standard deduction and reduction and elimination
of deductions.

Steps to Consider in the New Year

Analyze your cashflow for 2017: I know this sounds painful and complicated, but due to new financial technologies, it no longer is. If you truly want to create financial margin in your life and enjoy the sense of peace that comes along with that, you need to be intentional about where you send your dollars.

Align your spending with your values: Once you have 12 months’ worth of data, it is easy to identify patterns and opportunities for increased efficiency and alignment. Many families lower their spending by up to 20 percent without any meaningful reduction in quality of life.

Eliminate any non-deductible mortgage debt: You can either assign some of your newfound financial margin toward retiring this debt or consolidate with your first mortgage, which will then become deductible again, subject to the $750k limit.

Consider 529 accounts for your K-12 private school students: Colorado is one of the few states that allows essentially unlimited contributions to be deducted directly from your taxable state income, which results in an immediate 4.63 percent savings when funds are deposited. Those funds can then be used to pay qualified educational expenses such as K-12 private school tuition. This strategy is also an effective way to save 4.63 percent when paying qualified college costs out-of-pocket. Caution: On January 10, 2018, CollegeInvest noted that the Colorado state tax treatment of K-12 withdrawals is currently under legal review.

Increase your 401k contribution by one percent or more: Do this every year and you will get to the 10-15 percent savings rate recommended to fund your retirement.

Reevaluate your risk tolerance and stresstest your portfolio: The markets have had an amazing run over the past few years and your portfolio likely became riskier due to the larger increases in your equities. You also may not need as much growth to meet your long-term goals, so now may be a good time to rebalance your portfolio to a lower risk profile, which would also protect you in the event of a market correction.

To Learn More

We provide a compassionate and confidential approach to helping clients get their financial house in order, and we work on a fixed-fee retainer basis. We can also provide specific quotes for any of your one-time planning or investment needs, and we always offer an introductory meeting at no charge to allow you to ask us anything that is on your mind and get to know us better. 

Share |